S&P 500’s Record Highs belie the still Tough economic Reality

So, the S&P 500 has finally joined the Dow in notching up consecutive daily closing and intra-day highs this week (how much longer Tom Houggard will question). It is only the Nasdaq that is still over 1000 points from its all time high at the turn of the millenium. The headline index figures do not tell the real picture for many sectors of the US economy however…

It was the financial sector which pushed the real economy into the darkness in 2008 and although it seems that the financial sector is well and truly off life support with the extensive Government largesse that has been thrown at the sector with the likes TARP etc in the US, the real economy is still struggling to get back on track again as evidenced by the continued promotion of the QE policies.

The latest economic data shows improvement in terms of growth within the US economy, in fact growing for the 14th consecutive quarter, but the growth rate has been weak so far being resolutely unable to create jobs at the desired pace and labour market non participation flattering the headline unemployment rate. The unemployment rate has been decreasing steadily but at a slow pace. Unemployment claims have been consistently reported below 400,000 but have not been able to gain traction beyond this level during this recovery. The non-farm payrolls numbers have also displayed a trajectory of improvement but the latest report delivered a weak number that caused a small sell off in the equity market several days ago. It seems Main St USA is still not on 2 legs and marching along.

The massive and unprecedented cash injections by the US Federal Reserve have avoided the worst for sure, but continuing with such a treatment may not be much different than giving pain killers to a broken-leg patient…

After trading as low as 666 (the devils number!) in March 2009, the S&P 500 is now heading towards 1600 – an impressive more than doubling in its value. Unfortunately, this equity recovery is not reflecting a similar recovery in the wider US economy. The unemployment rate, while recovering from a high at 10% recorded in October 2009 to the current 7.6% reported for March 2013 is still some way of the low of 4.5% in 2006-07. More worrying, as detailed above, is the fact that a good part of the drop in the unemployment rate is due to a drop in the civilian workforce participation rate. The rate has moved from 65.8% in October 2007 to 63.3% today. Put simply, many people have simply given up looking for jobs and this is evidenced by record numbers of Americans on food stamps.

The primary concern of US policymakers remains the key one variable – unemployment. Proof of this concern is the current unemployment rate target adoption by the FED and used as the excuse for its continued monetary easing program… Indeed, a  ‘proper’ measure to account for a “real” unemployment rate is U-6. In October 2007 it pointed to a measure of 8.4% and is now at 13.8%.

A decreasing workforce, a slowly-decreasing unemployment rate along with a deterioration of labor conditions in terms of time and pay rate, has led to a severe deterioration of living conditions in the US for many. Let’s take a brief look at what has happened during this crisis –

One in six Americans now lives below the ‘poverty’ standard. Currently it corresponds to 50 million.

20% of the country’s children (2.8m) are classed as poor and 57% live in homes considered below “par”.

If adding ‘low income’ classification to poverty, the number of Americans living under that level rises to 146 million – almost half the country’s population.

The situation in inner cities is  the worst, where poverty affects more than 50% of habitants.

40% of unemployed workers have been out of work for at least six months.

1 in 4 Americans has a job paying less than $10 per hour, bringing home a salary that puts the family at, or below the official poverty level.

More than 100 million people are enrolled in at least one welfare program run by the Federal Government.

47.8 million are on food stamps – an all-time record.

54 million are on Medicaid, a program designed to help the poorest of the poor to obtain medical care while in the 60s, one out of fifty benefitted from Medicaid, now the proportion is more like one out of six.

The national debt amounts to $16.5 trillion, which corresponds to 105.8% of GDP and to a share per citizen of $52,420

And so, with this harsh economic reality to the majority of US citizens, it is becoming ever more questionable just what “Helicopter” Ben Bernanke and his band of merry monetary policy makers believe they are achieving with the QE programs, aside from inflating the net worth of the very richest citizens. Worse, as the equity markets continue to levitate, they are only now, after the massive gains, sucking in Main St – right towards the top rather than the bottom.

Should there be an exogenous shock that hits the stock market and economy, this time it will be much tougher for the policy makers to stem the rout as they won’t have the same tools available given their “spent” ammunition. With the European Union continuing to struggle to grow, and jobs not being created at the desired pace in the US, it may take just one or two more quarters before we see corporate profits dropping. Our analysis leads us to believe that the bull market is nearing its typical last stage now when the “fear” of missing out on further gains prompts Main St to chase valuations – precisely at the wrong time. Take a look at our bull market end guide on our Trading Guides page for a deeper explanation.

We believe that you should now be positioning yourself in selected commodities – silver, platinum and also the producers with healthy balance sheets geared to a rise in these commodities such as Lonmin, Bumi, Kazakhmys – all stocks trading at large discounts to book values and at historic cycle nadirs. The game in investing is to buy low and sell high, not buy high and “hope” to sell higher. Our Titan funds are readying for launch to the public in early May. Funds where we have our own money on the table. Click the image below to be first in the queue and invest alongside us in backing our conviction in the opportunities being presented in today’s investing landscape and positioning appropriately.